Wednesday, January 26, 2011

You know it's really getting sad when the media equates a reduced rate of credit growth in Canada to "people getting the message" on changing their spending habits. Instead of pointing out many Canadians just can't get any more credit, they try to make Canadians think they've heard the message and they're voluntarily slowing down their free-money spending binge. OK, sure, whatever.

Key points:

Mortgages outstanding are still rising at almost 7 per cent, year over year, but a monthly trend indicates the rate seen during the recession.

Mortgage arrears appear to have peaked, though they're stabilizing at twice the pace in the recession. That's still below the rates of past slumps.

Lines of credit are growing at 0.3 per cent a month, the slowest since 2007.

Debt is still rising at a pace that eclipses income, but not assets.

Debt interest payments now represent 7.2 per cent of disposable income, the lowest since mid-2006. (Think this might be because interest rates are the lowest since mid-2006? Rocket meet scientist)

Consumer bankruptcies are "in a clear downward trend."

There's a similar trend in delinquencies on consumer loans.

Emphasis mine. There's a reason why spending and borrowing are still growing, but at a slower rate than a year ago: the taps are slowly being turned off, interest rates are very slightly higher than they were one year ago and the pool of spenders are at or near the maximum in terms of their available credit. The situation isn't "getting better" because tapped-out consumers are "heeding the warnings."

In the interest of balance, it is true that asset growth is outpacing debt accumulation. You can thank a very robust stock market and a rebound in housing prices for this--both markets grew abnormally fast over the past 12 months, so this little indicator should be taken for what it is, not used to justify current debt accumulation trends.

The last few puffs into a balloon always seem to feel slower than the first don't they?

Originally I'd thought they might. Now, I'm not so sure. I'm beginning to think there might not be an early heated "spring market" before the implemented CMHC changes. There's been a big shift in the market over the early weeks of 2011, and it's demand driven, or I should say lack-of-demand driven. For as long as I can remember, single family homes priced below $500K were in high demand. Now? Not so much. The sheer lack of sales in this category this month has me scratching my head. Where did those buyers go? More importantly, are they just taking a breather or are they finally exhausted?

UPDATE: Demographia's most recent survey released today shows Victoria as Severely Unaffordable with the median house price requiring 7.1 times annual median household salary to purchase. We're more unaffordable than San Jose, San Diego, Los Angeles and Santa Barbara, California, heck, we're even more unaffordable than New York City! New York City? Yep, even that town that gave the world thin and runny salsa is more affordable than us. Congratulations Victoria, you've earned it!

Thursday, January 20, 2011

Look, if you absolutely must buy for the first time, right now, for whatever reason, you should be pricing in 2011 changes today. If you can't get a deal like that, you should be really, really, strongly inclined to walk away until you can.

With the mortgage rule changes, even focusing entirely on the periphery, pundits are saying that price declines across the market of 7% (that's seven percent) are completely reasonable.

If you're buying the average town home, your agreed-on price should be around: $434K x 0.93 = $403K

And if you can still get qualified for one of them old-fashioned 5% down, 35 year amortization, 7% cash back mortgages, you might be able to successfully bid on an average single family home in Victoria for: $647K x 0.93 = $601K.

My advice is worth what you paid for it (in case you're scratching your head, you paid nothing, so it shouldn't influence you in any meaningful way).

First off, I doubt it if this quote is accurate. The most popular mortgage product in Canada is a a five year term, so I don't see how "most of them" are "for terms longer than five years." I can't find it anywhere in CAAMP's actual report.

Nor can I find these two statements that appeared in CAAMP's fall consumer report; statements which can't be taken back empirically, and statements which shouldn't be ignored in light of CAAMP's renewed vigour against policy changes that make it harder for their members to make a buck:

16% of Canadians with a mortgage could not manage an extra $300 increase in mortgage payments.

In addition, 11% of households would run into financial trouble if mortgage rates rose only 1.5%.

That's a sizable issue for Canadian financial policy makers. And CAAMP just "forgot" to mention these folks in their latest report.

Remember, these rule changes don't prevent lenders from offering flexible mortgage terms to the 79% of prudent Canadian borrowers (as per CAAMP). These rule changes just mean the fringe won't benefit from subsidized interest rates through CMHC insurance anymore unless they can meet marginally more difficult terms, today.

Monday, January 17, 2011

Mortgages with amortization periods longer than 30 years will no longer qualify for government-backed mortgage insurance, which is required for buyers with less than a 20% down payment on a home. The previous limit was 35 years.

Maximum amount Canadians can borrow against the value of their homes, lowered to 85% from 90% on a refinancing.

Federal government backing for home equity lines of credit, or so-called HELOCs, is removed.

Adjustments on amortization and refinancing limits coming into force on March 18.

Government backing on HELOCs will be removed as of April18.

Interesting that the Department of Finance is spinning this as a "savings" move for consumers.

Reduce the maximum amortization period to 30 years from 35 years for new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent. This will significantly reduce the total interest payments Canadian families make on their mortgages, allow Canadian families to build up equity in their homes more quickly, and help Canadians pay off their mortgages before they retire.

Lower the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes. This will promote saving through home ownership and limit the repackaging of consumer debt into mortgages guaranteed by taxpayers.

Withdraw government insurance backing on lines of credit secured by homes, such as home equity lines of credit, or HELOCs. This will ensure that risks associated with consumer debt products used to borrow funds unrelated to house purchases are managed by the financial institutions and not borne by taxpayers.

These changes are actually more drastic than I'd expected. Especially on the HELOC side of things. IMO removing insurance on HELOCs is a direct hit on homeowner as second property speculator. Others will call that an abhorrent change that prevents people who can't manage their consumer credit from rolling their high interest debt into their homes. Because that's what a home is there for and all that...

I still expect a short term but subdued buying rush in the market. That may include a listings frenzy too as sellers try to sell before the rule changes in March. By mid-February I suspect there won't be a big bank in Canada still doing CMHC insured 35 year amortizations.

UPDATE: The effects of the mortgage rule changes will be felt in the sales stats. MLS numbers courtesy of the VREB via Marko Juras.

Saturday, January 15, 2011

You'll note the government has reigned in the CMHC twice since 2008 after opening the floodgates for loose lending in 2006:

0% down, 40 year amortization CMHC insured mortgages were eliminated in October of 2008

5% down, 35 year amortization CMHC insured mortgages were "pegged" to the 5-year fixed rate on offer moving forward from April 2010.

It's possible, though how likely is a wide open debate at this time, the government reigns in the CMHC again in 2011. We've heard speculation from changing the impact condo fees have on the qualification criteria all the way to upping the down-payment requirement and reducing the amortization period from 35 years to 30, perhaps even 25.

We've been having a discussion as to the effects this will have on people's ability to purchase a home in Victoria. Here it is all laid out for you. I used TD's mortgage calculator to generate these graphics. I used $400K as the mortgage amount and the "special offer" 5-year fixed rate to base the calculations on. The only thing I changed was the amortization period.

The total monthly payment changes $130 with a 5-year reduction in amortization and then $330 with a ten year reduction in amortization.

For a little perspective on the impact this may have, let me consult the most recent CAAMP survey on the state of mortgage financing in Canada:

16% of Canadians with a mortgage could not manage an extra $300 increase in mortgage payments.

In addition, 11% of households would run into financial trouble if mortgage rates rose only 1.5%.

In other words, 16% of current Canadian homeowners wouldn't be able to afford a $400K mortgage if amortizations dropped from 35 years to 25 years. Victorians don't have above average household incomes compared to their peers across Canada so we can safely say this kind of mortgage qualification change would be felt here in the first time buyer single family home market.

I think the likeliest change to come will be a reduction in amortization periods from 35 to 30 years. It's a small pill for Canadians to swallow at this time. I also think there's a fair probability that fixed interest rates climb over the calendar year, perhaps even by 1%. If that occurs, it has the combined effect equal to dropping the amortization to 25 years:

Minor tweaks, yet they may impact about 16% of the market. I know I'm reaching a bit with this analysis. But a bit of "what if" context is necessary to broaden the discussion, no?

UPDATE: While not official, it's about as close as it gets until tomorrow. 30 year amortizations and HELOC clamp-down coming. (H/T Reid). I expect a similar time line to last year's changes: no earlier than mid-April for implementation is my guess. Expect a short-term "busy" period in the market between now and then as people scramble to buy now before the rules change. I'd be expecting banks to almost-immediately implement the new rules, although current pre-approval terms will likely be honoured.

...overall average prices were stable and showed modest increases across major property types. The overall average price for single family homes increased by nearly 8.5 per cent; the average price for condominiums rose over four per cent and the average price for townhomes rose over three per cent.

and:

The value of all property transactions through the Victoria Real Estate Board’s Multiple Listing Service® (MLS®) system also declined by 14 per cent...

Emphasis mine. So prices are up, in some cases only slightly, and the total value of homes traded dropped, largely because sales volumes were down from the previous year. Fair enough.

Here's what the BC Real Estate Association has to say about property values in the Capital in 2010 (H/T A Simple Man). Dollar volume dropped -14.7%. So we've got harmony between the organizations here. No problem.

Until you look at the harmonized property values average prices. VREB breaks them out into the three most common property types as noted above. BCREA on the other hand lumps the lot together. And they report a drop in the average price of the lumped group of almost 5%.

How is this possible when the VREB is reporting price gains for all types of properties across the board? If you do the quick math, even dumbing it down to single digits, you get 8 + 4 + 3 = 15/3 = 5 which when I last checked was a positive number. But the BCREA average price reporting is 10% less than that.

Let me be clear: I'm not saying that any of these statistics are incorrect (although they could be), nor am I saying that either of these two organizations are purposely misleading the public. But I am saying that for whatever reason, and I believe the reasoning is carefully considered laziness, er, workplace efficiency, that real estate organizations that represent the REALTORS® have very little interest in transparency when it comes to their market data. I'm beginning to think there's not much point in paying attention to any of these numbers anymore. Which is likely what they want us to do.

Friday, January 7, 2011

The real estate statistics that are meant to tell the general public how healthy the local market is, are, well, basically meaningless as they are presented.

And they're meaningless on purpose, because it's easy to cook the statistics when you don't provide any analysis behind what they actually mean and how current market conditions might be responsible for misleading statistics.

Case in point: Royal LePage's unpaid advertisement (though their PR department likely costs them some sheckels) reprinted without a shred of balance or analysis in the Times Colonist today. (H/T Alexandrahere).

Here's the headline: Condominiums lead price gains

Funny that, for a guy who barely scans headlines anymore because of a lack of faith in local journalism, this headline makes me think that prices for all condominiums rose by more than any other property type. Except immersed in the market as much as we are around here we know this to be utter and total bullcrap.

Let's juxtapose this statement summing up the article in one sentence:

The survey noted prices increased in all housing types with standard condominiums leading the way with price gains of 7.5 per cent to $285,000 compared with the fourth quarter of 2010.

With what Just Jack wrote in the comments of the previous post here (he's in the know):

The median price for a non new 800 to 1000 square foot non view condominium in the core municipalities for the last 90 days of 2010 was $255,000.

The same median for the same period in 2009 was $272,000. A year over year drop of 6 percent.

The volume of sales also dropped 32 percent from this time last year.

The number of days to sell also increased 156 percent from 23 to 59 days.

The last time the median for this condominium grouping was at this level was the last 90 days of 2007 when the median was $252,000. The number or sales was also 30 percent higher then and it only took some 16 days to sell.

Condominiums have failed to build equity through appreciation for the last three years. The best way to insure that you will be priced out of buying a single family home is to buy a condominium.

Moral of the story? If a bunch of discounted luxury property sells in a down market, it doesn't make the market, it skews the statistics. The real estate industry does everyone--themselves, the media that nauseatingly repeats their press releases without a shred of analysis, the buyers and the sellers--a great disservice by presenting market data like they do.

Tuesday, January 4, 2011

It's January 4, 2011. And there's already news about what a great time it is to own real estate in Victoria.

BC Assessment released property assessments online yesterday and you'll be getting paper values in the mail this week if you're a homeowner.

What should you do with them? Well, if you plan to stay in your home you should dispute the assessment to get it lowered so you pay marginally less property tax. They've got assessments up this year on average around 4%, but that's very unlikely reflective of true market value which is arguably up twice as much year over year. You'll probably not gain much, and all you'll lose is your time if you do dispute your assessment, but keep in mind BC Assessment values July to July, not January to January.

And if you think you might sell this year? You might want to seek a higher assessment. Especially if your assessment is outside of 10% of what you think your home should sell for. Nothing puts a buyer off more than seeing a home assessed for $400,000 with an asking price of $650,000. Except maybe a salesperson who suggests that will save them on the property tax bill ;-).

In case you were looking for a riddle to answer:

VREB reports that the value of all properties sold through their MLS system in 2010 was down 14% from 2009, yet "The overall average price for single family homes increased by nearly 8.5 per cent; the average price for condominiums rose over four per cent and the average price for townhomes rose over three per cent."

How could this possibly be? You guessed it, volumes down, prices up, see real estate in Victoria can only go up, even when fewer people want to get some!

December 2010 was a flat month. I suspect very little change in reported pricing. Bring on the spring market. And the inevitable listings rush. If this is to be a bear year we should see new listings outstrip sales 4 to 1 from January to July. We'll need total active listings to jump above 4,000 very quickly. I expect flat reported pricing for the next 4 months.